Webinar addresses questions about 1603 grants

With the construction start deadline of the end of this year looming for the U.S. Department of the Treasury’s Section 1603 Grants for Specified Energy Property in Lieu of Tax Credits program, the criteria for that specification is still not clear to many applicants.

The topic stole the focus of the Sept. 29 American Biogas Council webinar Meeting the 1603 Deadline: Strategies, Safe Harbor and More. “That is the most looming deadline and probably the topic of interest to most folks,” said speaker Ellen Neubauer, grants program manager for the U.S. Department of the Treasury.

The program allows projects to receive a cash payment instead of investment or production tax credits. Projects must be energy property, defined by the Internal Revenue Code, and payments are the applicable percentage of the tax basis of the property, which will be either 10 percent or 30 percent, depending on the type of project.

The application deadline is Sept 30, 2012 and, besides having to start construction by the end of this year, eligible projects must also be placed in service by the credit termination date, which is the date the corresponding credit expires and is different for different technologies, Neubauer explained.

In order to be considered under construction, she continued, a project must begin physical work or meet a 5 percent safe harbor requirement. Physical work is clarified by the Department of the Treasury as continuous construction, excluding preliminary work like planning, designing and preparing land. “So physical work that begins by the end of this year must continue until the project is placed in service,” she said.

To meet the 5 percent safe harbor requirement, an applicant must pay or incur 5 percent of the total project cost by the end of this year. That includes all project costs, she clarified.

As of Sept. 1, more than 18,000 projects have been funded through Section 1603, Neubauer said. “Probably as of today that’s over 20,000,” she added. The vast majority of those projects are solar, with about 40 biomass awardees. Also, as of Sept. 1, about $8.5 billion has been awarded, most going to large wind projects, with $150 million awarded to biomass and $5 million to trash facilities.

There’s no such thing as too big or too small to get 1603 grants, said fellow webinar speaker Amish Shah, tax attorney with Sutherland Asbill & Brennan LLC, adding that they range from a couple hundred dollars to half a billion.

Shah also emphasized construction start parameters, saying many clients are unsure what they are. “What really is the law regarding the beginning of construction requirement?” he questioned, adding that the statutory language is limited. Treasury guidance for the program includes a grant packet, frequently asked questions, other information on the department website and oral and written responses to applicants, he said.

Continuing, Shah said if the Treasury denies an application, the sole recourse is litigation. To avoid that, applicants should ask themselves what areas could cause a denial, and assess the risks of those areas. Applicants should also consider how close to the edges the project should get. “Are there any possible “gaming of the system” arguments against the project?” he inquired.

Last, Catherine Lewis, North American business development manager for EPC (engineering, procurement and construction) provider Entec Biogas USA/Reynolds Inc., addressed aspects of project development, as well as project challenges. Her simple and straightforward list of project steps included areas such as economics; base elements like feedstocks and location; project delivery method; requests for proposals; review of requests for proposals and selection of an EPC contractor; permitting; and completion, among several others. Project challenges she named, not surprisingly, included financing, permitting and site location.

Most EPC providers are flexible and will work around the project developer’s grant schedule, she added, completing first the portions of the design that will be required for the grant. But that model takes time, she cautioned.